New home launches to drop 10%, sales to rise 20% in short term: JLL-Khaitan & Co report

NEW DELHI: New home launches across India are expected to decrease by 20% and home sales are expected to rise by 10% in the short term as a fallout of the implementation of the new real estate regulatory bill, says a new report.

Foreign direct investment into the real estate sector is also expected to increase by 20%, says a the report by property consultancy JLL India and law firm Khaitan & Co.

The Real Estate (Regulation and Development) Act 2016, was recently passed in the Parliament and it received the assent of the President of India on March 25, 2016, paving the way to bring much-needed transparency and accountability in the real estate sector.

The new Act also doesn't allow developers to sell homes before they get all the project approvals, thereby increasing the cost of capital for them as they will have to now look for equity rather than structured debt to finance land buys.

However, home prices will remain stable, as developers won’t risk passing on the rise in capital cost on to the buyers in the current scenario of weak market conditions,

"Banks are likely to start funding for land purchases as well, although with riders (e.g. construction start date), which can keep land acquisition costs in check," said the report.

Individual or group investors (also known as apartment funds) who mostly invested in the residential asset class with an intention to exit even before the project is completed, will have to participate as lenders and not as investors.

"They will have to be prepared for a longer period (at times, up to completion of projects) for making returns on their funds lent," the report said.

Banks will find themselves in more secure situation with project cash flows operated from a project specific separate account thus adding comfort to debt servicing by the developer, but at the same time, they will revisit debt product offering.

The typical product offering of a bank will change from the typical term loan to overdraft, as corporate loans will also get more difficult to obtain. Lease Rental Discounting could also go up due to this.

A major drawback of real estate regulatory Act is that it has no punitive measures recommended on sanctioning authorities for delays in approvals, a major reason for rise in home prices in previous years across India.

However, the entire approvals’ process is expected to shorten over the next few years with the central government moving most approvals online and planning to come up with a credit rating mechanism for civic bodies.